The smart home devices sold by Google's home automation subsidiary, Nest, represent just a small fraction of the burgeoning Internet of Things (IoT) market. However, Nest has become one of the most recognizable IoT brands to tech-savvy consumers, and the company's recent struggles to bring new products to market and its decision to end support for an IoT hub it acquired two years ago could have a lasting impact on the IoT movement.

At the end of 2015, nearly 20 percent of all U.S. households with broadband connections owned at least one smart home product, according to the research firm Parks Associates. During the next decade, that number is projected to jump to 66 percent as more thermostats, cameras, video doorbells, door locks, lights, controllers and yet-to-be-released smart home products make their way into American households, the company says.

"[IoT] will live up to a lot of the hype," says Kevin Meagher, senior vice president of business development at Roc Connect, a company that provides an IoT ecosystem for enterprises. "Whether it lives up to all of it, well that's to be debated, but it will grow significantly."

'Battle of egos' hampers smart home interoperability

The primary issue facing the industry today is not technology, it's the business models that companies such as Nest use in attempts to claim complete control over their users' data, according to Meagher, who also previously lead Lowe's smart home initiative, called Iris. "Consumers don't want just one connected smart device and consumers are never going to buy all of their smart devices from the same supplier," he says. "The problem is that everybody wants to own the consumer, they want to own the relationship and they want all the data."

Meagher says he's confident the market will grow quickly once proprietary systems give way to a more open environment. Until then it will continue to be a "battle of egos and brands to try and be the one that owns the consumer interface" and relationships with service providers.

Many large IoT players approach the smart home market with their own priorities top of mind, and that strategy is holding the industry back, according to David Moss, president and CTO of People Power, an open mobile platform for IoT service providers. "Because there's so much money behind each of these different protocols, I don't exactly see them all going away." However, it could take at least a decade before the industry adopts a global standard, he says.

Nest promotes openness in its marketing, but the company's restrictive terms and business model don't deliver on that message, according to Moss. "Google wants to be the brain of your home, your building and life, and so they need access to lots of data to do that," Moss says. "They've taken some very strategic steps in the formation of their terms of service, and their policies for how you connect with their products in a way that enables them to maintain control of the data and ultimately be the brain."

If companies want to thrive in the connected home market, they need to open up their APIs and connect with other manufacturers' devices or ecosystems without prejudice, Moss says. More than half of all U.S. households with at least one smart home device say interoperability is very important, and the sentiment increases with each new IoT device they add, according to the Parks Associates research.

"Connectivity is changing the business models for a variety of products, and while consumers have multiple channels available to acquire smart devices and solutions, they clearly recognize the added value of connectivity," says Stuart Sikes, president at Parks Associates. "As home automation solutions become more common and affordable, interoperability will be a differentiator."

In defining smart home market, Nest limited its own potential

Nest helped validate the concept of IoT by breathing new life into many ordinary devices, such as the boring old thermostat, but it failed to keep the momentum going with new products. "It seems like they may be having some internal issues getting products off the ground," Moss says.

Earlier this week, the company also announced plans to shutter Revolv, a smart home hub manufacturer it acquired in 2014. Nest also said it will stop supporting Revolv."This move creates a general atmosphere of distrust for consumers who are exploring connected home solutions," Moss says. "I think this is bad not only for Nest's brand and Google as it relates to the trust that they're trying to build in their consumer base, but this is coming at a time when the IoT market is growing and consumer awareness continues to build. Companies in this space really need to band together to make this new phase of the Internet actually work well for real people."

Smart home needs "hubs" to connect their various components, and without a product such Revolv, Nest will struggle to scale, according to Meagher. "Nest is very good at smart devices, but that doesn't make them a smart home provider. That's where they get confused. A smart home is about working with all the other things in the home."

Meagher says Nest's assumption that its thermostat can serve as an IoT hub shows arrogance. "Frankly, Nest is still just a smart thermostat," he says. "It's definitely not a smart home, and that's because they are confused about what they are, and their strategy's just wrong. The hub strategy's the only way to go forward."

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